Retirement (Decumulation) Specific Portfolio

billy2shots

Nebulous2 said:

billy2shots said:

JohnWinder said:

Again, that's not what historic patterns show us.

I think we’d all benefit from seeing your data on this because it will enhance our understanding. The firecalc data indicates something different, with 70/30 having a lower failure rate (by 1.7%), 

Using FI Calc. Matching equity and bond fees at 0.5% it shows the following. 

40 year retirement.
£900k starting pot

£29,375 drawdown each year

100% equities= 100% chance of success (lasting the full 40 years) 

3 out of 112 'nearly fails' (final pot size less than 35% of the original pot size)

58.4% chance of a large pot at the end of 40 years (greater than 300% of the starting pot). 

Vs

70% equities 30% bonds= 99.11% chance of success (lasting the full 40 years) 

1 fail

3 'nearly fails'

31.25% chance of a 'large end pot'

Vs the much talked about 60/40


60% equities, 40% bonds = 98.21% chance of success (lasting the full 40 years) 

2 fails

7 nearly fails

23.21% chance of a 'large end pot'

Reducing the same example to a 30 year retirement with 100% equities Vs 70/30  gives identical success rates (100%) and 'nearly fail' rates (2/122). 

A big difference in pot size left over 46.72% chance of a 'large end pot' for 100% equities Vs 29.51% for the 70/30

The famous 60/40 over 30 years keeps the same 100% success rate but adds an additional ' nearly fail' making that 3/122. 
It also drops the chance of a large pot to 17.21%

I don't have a horse in this race, but how is that £29,375 indexed? 

Would you increase your withdrawals by CPI each year? 

From the outside looking in - that doesn't seem a lot for a 900k pot. That would mean a withdrawal of £35k at the LTA. 

That would rise with inflation calculated at 3% according with FICalc's interpretation/modeling 

You or I can argue that 3% year on year is too high or too low but 3% is what the above example is based on. 

Inflation Rate in the United Kingdom averaged 2.68 percent from 1989 until 2022, reaching an all time high of 11.10 percent in October of 2022 and a record low of -0.10 percent in April of 2015.




It's basically giving the following model

A 3.25% safe withdrawal rate

Rising by 3% each year

Giving a historic success rate of 100%

OldScientist

billy2shots said:

JohnWinder said:

Again, that's not what historic patterns show us.

I think we’d all benefit from seeing your data on this because it will enhance our understanding. The firecalc data indicates something different, with 70/30 having a lower failure rate (by 1.7%), 

Using FI Calc. Matching equity and bond fees at 0.5% it shows the following. 

40 year retirement.
£900k starting pot

£29,375 drawdown each year

100% equities= 100% chance of success (lasting the full 40 years) 

3 out of 112 'nearly fails' (final pot size less than 35% of the original pot size)

58.4% chance of a large pot at the end of 40 years (greater than 300% of the starting pot). 

Vs

70% equities 30% bonds= 99.11% chance of success (lasting the full 40 years) 

1 fail

3 'nearly fails'

31.25% chance of a 'large end pot'

Vs the much talked about 60/40


60% equities, 40% bonds = 98.21% chance of success (lasting the full 40 years) 

2 fails

7 nearly fails

23.21% chance of a 'large end pot'

Reducing the same example to a 30 year retirement with 100% equities Vs 70/30  gives identical success rates (100%) and 'nearly fail' rates (2/122). 

A big difference in pot size left over 46.72% chance of a 'large end pot' for 100% equities Vs 29.51% for the 70/30

The famous 60/40 over 30 years keeps the same 100% success rate but adds an additional ' nearly fail' making that 3/122. 
It also drops the chance of a large pot to 17.21%

Thank you for showing where the numbers come from. Just a few comments...

1) Most of the 'rules of thumb' have been developed for 30 year US retirements (rather than 40 years) and are not necessarily applicable to other scenarios (see Estrada, Maximum Withdrawal rates: An empirical and global perspective for a discussion of non-US withdrawal rates - all 30 years however).
2) The metric used (i.e., failure rates or maximum safe withdrawal rate, MSWR) can also change the conclusions since the MSWR concentrates on the worst historical case (which may be different depending on the asset allocation) and the failure rates on a collection of the worst cases.
3) For a UK retiree holding UK assets (not terribly realistic nowadays, but does use UK inflation which is higher than US), the historical success rate would have been 98%, 97%, and 85% for 100/0, 80/20, and 60/40 portfolios, respectively (see https://www.2020financial.co.uk/pension-drawdown-calculator/ - note no fees in this simulator, but success rates would be lower with 0.5% fees). This is largely because there have been long periods (e.g. post WWII) where UK bonds have not performed well in real terms. (historically, for the UK, cash has been a better bet than bonds in bad retirements - I note that FI calc does not use historic returns for US cash)
4) For the US data, there is a difference in performance at 100% equities between annual data (e.g. FI calc) and monthly data (e.g. ERN spreadsheet) because of the relatively short lived crash in 1929 (for annual data the results depend on what month you decide to use, i.e. December to December, January to January, etc.). For example, the ERN spreadsheet (Version 2.0, March 2019) has failure rates with a 3.25% withdrawal of 1.1%, 0.1%, and 0.3% for asset allocations of 100/0, 80/20, and 60/40, respectively (with 0.5% fees). I note that there are also some other minor differences between how ERN has implemented the backtesting in his spreadsheet and how FI calc does it.

Given the historical data, I suspect, that the main problem with 100% stocks is psychological rather than financial - stocks can drop fairly quickly which is noticeable and may induce panic (there were some interesting threads on bogleheads during the 2008 financial crash, where people were considering abandoning their 'buy, hold, and rebalance' approach), while bonds (and cash) tend to lose value more slowly (notwithstanding this last year!) and, so, less obviously.

The presence (or otherwise) of other sources of inflation linked income (property, state pension, DB pension, bond ladders, and annuities) can also influence the asset allocation in the risk portfolio.

JJforever

Linton said:

Rather than trying to devise an asset allocation that simultaneously meets all these requirements my wealth is divided into 4 separate tranches or pots:


2) Diversified income investments, dividends and interest to provide fairly stable monthly income with minimum management - INC funds and ITs
3) Wealth preservation for medium term protection- specialist funds/ITs
4) Diversified long term Growth - 100 % equity

Linton, out of curiosity do you use different platforms or just one account?

Thank you

Linton

JJforever said:

Linton said:

Rather than trying to devise an asset allocation that simultaneously meets all these requirements my wealth is divided into 4 separate tranches or pots:


2) Diversified income investments, dividends and interest to provide fairly stable monthly income with minimum management - INC funds and ITs
3) Wealth preservation for medium term protection- specialist funds/ITs
4) Diversified long term Growth - 100 % equity

Linton, out of curiosity do you use different platforms or just one account?

Thank you

I use 4 different accounts because I have to - His and Hers ISAs and SIPPs. They happen to be on 3 different platforms mainly for historical reasons.  There is no general policy to keep each portfolio on its own platform - that would make rebalancing of portfolios almost impossible.  3 of the 4 platforms contain Growth funds.  One of the ISAs is used for all income funds because paying dividends out of a SIPP would be a major hassle whereas it can be done automatically from an ISA.

Qyburn

Linton said:

1) Cash for major planned one-off expences, emergencies and short term failures of the income investments - PBs and current accounts
2) Diversified income investments, dividends and interest to provide fairly stable monthly income with minimum management - INC funds and ITs
3) Wealth preservation for medium term protection- specialist funds/ITs
4) Diversified long term Growth - 100 % equity

Out of interest what do you use for your (3)?  Things specifically called "Wealth preservation" seem to have a bad rep on here, but the objective seems very desirable.

bostonerimus

OldScientist said:

billy2shots said:

JohnWinder said:

Again, that's not what historic patterns show us.

I think we’d all benefit from seeing your data on this because it will enhance our understanding. The firecalc data indicates something different, with 70/30 having a lower failure rate (by 1.7%), 

Using FI Calc. Matching equity and bond fees at 0.5% it shows the following. 

40 year retirement.
£900k starting pot

£29,375 drawdown each year

100% equities= 100% chance of success (lasting the full 40 years) 

3 out of 112 'nearly fails' (final pot size less than 35% of the original pot size)

58.4% chance of a large pot at the end of 40 years (greater than 300% of the starting pot). 

Vs

70% equities 30% bonds= 99.11% chance of success (lasting the full 40 years) 

1 fail

3 'nearly fails'

31.25% chance of a 'large end pot'

Vs the much talked about 60/40


60% equities, 40% bonds = 98.21% chance of success (lasting the full 40 years) 

2 fails

7 nearly fails

23.21% chance of a 'large end pot'

Reducing the same example to a 30 year retirement with 100% equities Vs 70/30  gives identical success rates (100%) and 'nearly fail' rates (2/122). 

A big difference in pot size left over 46.72% chance of a 'large end pot' for 100% equities Vs 29.51% for the 70/30

The famous 60/40 over 30 years keeps the same 100% success rate but adds an additional ' nearly fail' making that 3/122. 
It also drops the chance of a large pot to 17.21%

Thank you for showing where the numbers come from. Just a few comments...

1) Most of the 'rules of thumb' have been developed for 30 year US retirements (rather than 40 years) and are not necessarily applicable to other scenarios (see Estrada, Maximum Withdrawal rates: An empirical and global perspective for a discussion of non-US withdrawal rates - all 30 years however).
2) The metric used (i.e., failure rates or maximum safe withdrawal rate, MSWR) can also change the conclusions since the MSWR concentrates on the worst historical case (which may be different depending on the asset allocation) and the failure rates on a collection of the worst cases.
3) For a UK retiree holding UK assets (not terribly realistic nowadays, but does use UK inflation which is higher than US), the historical success rate would have been 98%, 97%, and 85% for 100/0, 80/20, and 60/40 portfolios, respectively (see https://www.2020financial.co.uk/pension-drawdown-calculator/ - note no fees in this simulator, but success rates would be lower with 0.5% fees). This is largely because there have been long periods (e.g. post WWII) where UK bonds have not performed well in real terms. (historically, for the UK, cash has been a better bet than bonds in bad retirements - I note that FI calc does not use historic returns for US cash)
4) For the US data, there is a difference in performance at 100% equities between annual data (e.g. FI calc) and monthly data (e.g. ERN spreadsheet) because of the relatively short lived crash in 1929 (for annual data the results depend on what month you decide to use, i.e. December to December, January to January, etc.). For example, the ERN spreadsheet (Version 2.0, March 2019) has failure rates with a 3.25% withdrawal of 1.1%, 0.1%, and 0.3% for asset allocations of 100/0, 80/20, and 60/40, respectively (with 0.5% fees). I note that there are also some other minor differences between how ERN has implemented the backtesting in his spreadsheet and how FI calc does it.

Given the historical data, I suspect, that the main problem with 100% stocks is psychological rather than financial - stocks can drop fairly quickly which is noticeable and may induce panic (there were some interesting threads on bogleheads during the 2008 financial crash, where people were considering abandoning their 'buy, hold, and rebalance' approach), while bonds (and cash) tend to lose value more slowly (notwithstanding this last year!) and, so, less obviously.

The presence (or otherwise) of other sources of inflation linked income (property, state pension, DB pension, bond ladders, and annuities) can also influence the asset allocation in the risk portfolio.

I think that the Stdev of the portfolio balance for various asset allocations might be a factor worth considering. The models for drawdown do not factor in panic and silly reactions to large falls in the portfolio value and they might be mitigated with portfolios with more stable values.

Linton

Qyburn said:

Linton said:

1) Cash for major planned one-off expences, emergencies and short term failures of the income investments - PBs and current accounts
2) Diversified income investments, dividends and interest to provide fairly stable monthly income with minimum management - INC funds and ITs
3) Wealth preservation for medium term protection- specialist funds/ITs
4) Diversified long term Growth - 100 % equity

Out of interest what do you use for your (3)?  Things specifically called "Wealth preservation" seem to have a bad rep on here, but the objective seems very desirable.

WP funds are advocated by several  retired people on this forum. I dont think  they are relevent for people who are still accumulating..  I use Troy Trojan and Capital Gearing Trust.  In my view is only one other fund (Personal Assets Trust which is very similar to Troy Trojan) that really meets the WP classification.

pricedout_1

I use the Ruffer fund (RICA) for Capital Preservation/Total Return which is an award-winning fund in this class and has done it's job well in the latest downturn. I think these funds have a place in the accumulation phase to protect capital on the way down to then re-allocate/rebalance on the way up. I guess it's a bit of a 'Best Asset Now' strategy that seems to be gaining ground in the US with the likes of Chris Vermeulen who is regularly interviewed on financial investment media in the US.